Who doesn’t love a huge M&A due diligence report?
DD reports that are hundreds of pages long are perfect.
At least for propping doors open and increasing muscle load.
If (when) printed, they also make the most satisfying thud when they hit the desk.
It is hardly a secret that few DD reports are read in their entirety by deal teams.
Like those leaflets you find in pill boxes (written in tiny font and in many languages), there seems to be a growing suspicion that, increasingly, DD reports may not actually be designed to be read cover-to-cover.
One US partner of a global PE firm told me that, within her firm, there was a consensus that less is more, at least for certain risk-focused workstreams (tax, legal, technical and ESG were the examples given).
By extension, there was no longer any real comfort derived from receiving “a great big phonebook of a DD report”.
Investors are increasingly looking to streamline processes for reporting on DD risks.
The usual concerns that GPs have with shorter reports relate to external stakeholders: will their co-investors and deal insurers be comfortable with them?
Understandably, they are most wary of the insurers who are often perceived to be the most risk averse.
Speaking to underwriters, the feedback was unanimous: they neither need nor, in many instances, want long-form reports.
Unsurprisingly, what matters most is substance rather than form.
- The primary focus is on the DD scope.
- Then the quality of the DD exercise itself.
- A long-form report isn't needed to demonstrate either of these.
It is common to see insured deals with “red flag” reports (at least outside of financial DD).
Particularly in the US mid-market, “DD memos” are becoming more common, usually for legal diligence. These tend to be materially shorter than even red flag reports.
DD reports prepared by internal corporate teams are usually shorter and, of course, do not come with the logo of an external advisor. Underwriters used to approach these reports with scepticism.
Now, given how focused internal reports usually are on what really matters to the business – provided they meet certain minimum requirements (e.g., they are not merely an agenda for internal discussion) - insurers often place greater value on them.
This is another example of substance trumping form.
The theme is similar with sophisticated co-investors.
One senior director told me “we need to feel confident that the guys driving the bus have done a thorough job of assessing all the key risks, but that doesn’t usually correlate to receiving huge DD reports”.
In summary then, and to bastardize a Mark Twain quote, is the reason we still see so many long-form reports because we don’t allow enough time to write short ones?
How much longer do you think we will continue to hear that comforting thud of a huge DD report landing on the desks of investors?
